From Environmental Capital (RGGI Bar):
The biggest U.S. experiment so far in capping greenhouse-gas emissions and trading those pollution permits has run into a problem: There are more permits than needed, sending their prices plunging.
There are three reasons for that, all germane to the wider debate over how the government can use a cap-and-trade program to spur environmental progress.
First, state authorities appear to have made a similar mistake as European authorities did when they started their own cap-and-trade program. That is, they over-estimated the amount of permits that power companies would need to cover their emissions requirements. The result is a surplus of pollution permits, which pushes their price down.
Second, the recession whacked demand for electricity, which means that power plants emitted even less than they thought they would.
Third, cheap natural gas over the last year has made it easier for power companies to switch to the cleaner-burning fuel, which again means fewer emissions of greenhouse-gases. ...
RGGI’s experience doesn’t mean that a cap-and-trade approach doesn’t work for tackling emissions. In fact, in the near term at least, it makes the burden a lot easier to bear for utilities and other companies.
But it does underscore one big lesson for any national cap-and-trade plan, like the one simmering on the Hill: If emissions caps are meant to drive innovation and clean-energy in the electricity business, then the caps better be tight-fitting, not floppy around the ears.
Those who claim that too many permits is a problem with cap-and-trade are misguided, at best, or disingenuous*, at worst. Distributing too many permits (i.e., lax environmental standards) is a political problem, not economic.
*The second time I've used that word in as many weeks! Here is the first.
